Internal Revenue Service employees pushed too hard to impose levies on elderly people’s Social Security benefits, leading to economic hardship for some low-income people with tax debts, according to a new report.

J. Russell George

The report, from the Treasury Inspector General for Tax Administration, acknowledged that most IRS revenue officers abided by the law when issuing levies, but in some cases they failed to give taxpayers exemptions from the levies, which they had the discretion to permit.

TIGTA noted that Social Security benefits are the main source of income for many elderly and low-income taxpayers. While the IRS can impose a levy on Social Security benefits, the Tax Code requires the agency to release levies that cause economic hardship. Taxpayers also have the right to claim an exemption against the levy, enabling them to receive a minimum amount of the Social Security payment while eliminating all or part of the levy.

IRS revenue officers make levy determinations of Social Security benefits on a case-by-case basis and are able to exercise their own judgment when deciding whether to impose a levy on someone with outstanding tax debts.  The IRS has special procedures and thresholds in place for levying individual retirement accounts and 401(k) retirement accounts, but there are no special considerations or procedures for when revenue officers impose a levy on Social Security benefits. In such cases, revenue officers tend to follow the general procedures for levying assets, and they usually comply with those same procedures when levying Social Security benefits.

However, for 15 percent of the sample cases examined by TIGTA, the levy action probably caused or exacerbated economic hardship for those Social Security recipients. A change in collection policies at the IRS seems to give equal weight to nonlegal considerations (such as whether taxpayers are “cooperative,” according to the revenue officers’ subjective determination) and the legal requirement to release the levy when the IRS decides it is creating an economic hardship for a taxpayer. In these cases, revenue officers should have realized the taxpayers were experiencing economic hardship, according to the report.

IRS procedures allow revenue officers to manually levy up to 100 percent of Social Security benefits, but taxpayers have the right to claim an exemption from the levy. However, in 28 percent of the cases sampled by TIGTA, revenue officers used the wrong form to levy Social Security benefits. As a result, the IRS did not consider the exemption amounts before imposing the levy. Of those cases, 6 percent involved taxpayers who suffered greater Social Security levies than allowed by law.

“TIGTA’s audit found that a change in policy at the IRS likely contributed to levies that caused economic hardship,” said TIGTA Inspector General J. Russell George in a statement. “We believe the IRS needs to adjust its policies and procedures to allow revenue officers, with appropriate discretion, not to levy if facts and circumstances clearly show that taxpayers are in or on the threshold of an economic hardship.”

TIGTA made five recommendations, four of which the IRS agreed with, while partially agreeing with the fifth suggestion. The report recommended the IRS provide guidance on levying Social Security benefits and give examples to its revenue officers and revise the Internal Revenue Manual to clarify that levy actions should not be taken if they are likely to cause or exacerbate an existing economic hardship based on the facts and circumstances of the case. The IRS should also review the levy determinations to identify those that caused financial hardship, and it should remind employees about the proper form to use when levying Social Security benefits, TIGTA suggested. The IRS should also provide the opportunity to claim the proper amount of exemptions allowed for the affected taxpayers whose cases were included in TIGTA’s sample.

The IRS said it plans to provide guidance on using discretion before levying Social Security benefits and to clarify the Internal Revenue Manual to spell out the requirements for a determination of economic hardship, while also reminding employees to use the proper forms. The IRS also intends to review the levy determinations for the levies that caused financial hardship. However, the IRS did not agree to provide all taxpayers in TIGTA’s sample the opportunity to claim the proper amount of exemptions allowed. TIGTA said it believes all of its recommendations would benefit the IRS and taxpayers.

“We appreciate your recognition that in the overwhelming majority (85 percent) of the cases you reviewed, the decision to levy was in compliance with existing IRS procedures and the law,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “Indeed we assert that our compliance rate is even higher than that, as your findings with respect to the remaining 15 percent of the cases you reviewed are speculative in nature. We do not agree that TIGTA identified any cases in the sample they examined wherein the levy caused an economic hardship at the time the levy was issued. There is no legal requirement that the IRS complete an economic hardship determination prior to issuing the levy. At the time the levies were issued, the revenue officers were acting within their sound discretion when they could not secure or verify the taxpayers’ financial information.”